MONEY MATTERS

Silver lining in hoarded currency

A sign that our currency has real value.

In Summary

• It is something of a compliment that our high denomination currency faces much the same challenges as the US dollar or the Euro.

• People, in general, don't go about hoarding large amounts of currency which nobody would want to receive in exchange for goods or service.

The debate over the government’s decision to demonetise the “old” Sh1,000 note, and introduce a new one, has mostly focused on what happened in India back in 2016.

As the New York Times reported it on November 8, 2016, “Prime Minister Narendra Modi fired a direct shot at India’s endemic corruption with a surprise move on Tuesday to ban the country’s largest currency bills, starting the next morning.

"The ban is intended both to curb the flow of counterfeit money and to take aim at terrorist organisations that rely on unaccounted-for cash. It is also expected to help the government clean up a system that has relied on cash to pay bribes and to avoid taxes.”

Now that reference to “a system that has relied on cash to pay bribes and to avoid taxes” and which therefore needs cleaning up, sounds very much like Kenya.

Further, with India’s economy being so much bigger and far more sophisticated than Kenya’s, it would seem – on the face of it – that this demonetisation of the high-value bills is a good thing.

Amidst all the corruption scandals and white elephant public projects which have been the focus of debate on the economy, it would seem that Kenya’s aspiration to serve as the regional financial centre is well on track.

Basically then, such a step is an acknowledged tactic for forcing out into the open, large sums of money believed to have been hidden – pending eventual deployment – for mostly criminal reasons.

So far so good.

But of equal interest is that apparently Kenya and India are not the only nations that have a problem of crooks (or even terrorists) using their high-value currency for criminal operations.

It would seem that the US has the same problem too.

As the Nobel Prize-winning economist Paul Krugman noted in his blog back in July 2013: The motives for holding cash, especially in the form of $100 bills, have been around for a long time; in large part it’s about evading taxes, and the law in general. (Latin American drug lords hoard high-denomination dollar currency; Russian beeznessmen do the same with big euro notes)

This was explained in even more detail in the website, money.com in November 2013: Money laundering, tax evasion, drug dealing, human trafficking, and a whole host of other criminal activities run on cash. Big banknotes are a convenient way to transfer funds anonymously with finality. A $100 bill weighs less than a gram, so $1,000,000 weighs roughly 10kg and is small enough to fit in a medium-size briefcase.

"To put it simply, most of the U.S. currency in circulation is almost surely being used by criminals…The Financial Accounts of the United States put the total value of U.S. dollar currency held outside the country at $676 billion. Assuming this is almost entirely in the form of $100 bills, it represents about one-half the number in circulation.”

So, what does all this really signify?

First, I would say it is something of a compliment to a developing nation like Kenya, that our high denomination currency faces much the same challenges as the US dollar or the Euro. People, in general, do not go about hoarding large amounts of currency which nobody would want to receive in exchange for some goods or service.

If corrupt Kenyan elites and assorted regional crooks within greater Eastern and Central Africa, all find it safe to store their ill-gotten wealth in Kenyan currency, then that is a sign that our currency has real value.

The second point I would make is that amidst all the corruption scandals and white elephant public projects which have been the focus of debate on the economy, it would seem that Kenya’s aspiration to serve as the regional financial centre is well on track.

And this is not just a matter of Kenyan banks having branches in neighbouring countries.

For as those of us who have travelled around the region know, it is not only Kenyans who will have to hand over their “old” Sh1,000 notes. There are plenty of these in circulation in virtually every country with which we share a border – with some establishments in those countries openly favouring payment in Kenya shillings.

Unless of course you prefer to pay in US dollars or euros.